2025 (7) TMI 989 - HC - GST

GST authorities must unblock Input Tax Credit when taxpayer files appeal with 10% deposit under Rule 86A

The Madras HC directed respondents to unblock petitioner's Input Tax Credit (ITC) that was blocked under Rule 86A of CGST Rules. Respondents contended the ... Direction to unblock the petitioner's Input Tax Credit (ITC) under the Tamil Nadu Goods and Service Tax Act, 2017 (TNGST Act)/Central Goods and Service Tax Act, 2017 (CGST Act) - contention of the respondents is that the restrictions under Rule 86A of the CGST Rules has to remain in force for a period of one year in terms of Rule 86A(3) - HELD THAT:- Dealing with a somewhat identical situation, this Court passed an order in the case of Tvl.New Royal Traders Vs Assistant Commissioner RAL, Alandur Assessment Circle, Nandanam, Chennai [2023 (9) TMI 767 - MADRAS HIGH COURT] where it was held that 'The credit amount of Rs. 37,71,590/- that has been blocked shall be unblocked subject to the petitioner depositing 10% of the amount confirmed vide order dated 08.08.2023. It is made clear that if the petitioner fails to file an appeal within the statutory period prescribed under Section 107 of the TNGST Act, 2017, the respondent is at liberty to block the aforesaid credit amount that may be lying unutilized in the electronic credit ledger of the petitioner.' A reading of Paragraph Nos.5 to 9 of the aforesaid order indicates that if an appeal is filed by depositing 10% of the disputed tax, the restrictions under Rule 86A(3) of the CGST Act will come to an end. There shall be a direction to the respondents to unblock the petitioner’s Input Tax Credit, which was blocked on 22.05.2025 and 27.11.2024 - Petition disposed off. 1. ISSUES PRESENTED and CONSIDERED- Whether the blocking of the petitioner's Input Tax Credit (ITC) under the Tamil Nadu Goods and Services Tax Act, 2017 (TNGST Act) and Central Goods and Services Tax Act, 2017 (CGST Act) pursuant to Rule 86A of the CGST Rules is lawful and whether such blocked ITC should be unblocked pending disposal of the petitioner's appeal.- Whether the restrictions imposed under Rule 86A(3) of the CGST Rules, which mandate a one-year blocking period of ITC, can be lifted upon the petitioner filing an appeal and depositing 10% of the disputed tax amount.- The scope and effect of the assessment order dated 04.02.2025 on the petitioner's entitlement to ITC and the procedural requirements under Section 107 of the respective GST enactments for filing an appeal.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legality of Blocking ITC under Rule 86A of the CGST Rules and Duration of BlockingThe legal framework governing the blocking of ITC is primarily Rule 86A of the CGST Rules, which empowers the tax authorities to restrict the utilization of ITC in certain circumstances, including where an assessment order confirms tax liability. Rule 86A(3) specifically mandates that such blocking shall remain in force for a period of one year from the date of blocking.The respondents contend that the blocking of the petitioner's ITC is justified and must continue for the full one-year period as per Rule 86A(3). The petitioner challenges this, seeking unblocking of the ITC to enable utilization.The Court referred to a prior judgment involving a similar factual and legal matrix, where the Court had held that the blocking under Rule 86A(3) is not absolute and can be lifted if the petitioner files an appeal under Section 107 of the GST Act and deposits 10% of the disputed tax amount. This precedent establishes that the one-year blocking period is subject to modification upon compliance with these conditions.The Court found no contrary judgments to dispute this interpretation, thereby affirming that the blocking is not an automatic, unalterable sanction but is subject to procedural safeguards and conditions designed to balance the revenue's interest and the taxpayer's rights.Issue 2: Effect of Assessment Order and Filing of Appeal under Section 107The petitioner had suffered an assessment order dated 04.02.2025 for the relevant tax periods, which confirmed the tax liability and led to the blocking of ITC. The petitioner filed an appeal on 12.05.2025 under Section 107 of the GST enactments challenging the assessment order.The Court emphasized the importance of the appeal process under Section 107, which provides a statutory remedy against assessment orders. The Court's earlier ruling clarified that filing an appeal coupled with depositing 10% of the confirmed tax amount is a condition precedent to lifting the ITC blocking.The Court noted that the petitioner complied with the procedural requirement by filing the appeal. Although the judgment does not explicitly mention the deposit of 10% in this case, the reliance on the precedent suggests that such compliance is necessary to justify unblocking.The Court also underscored that failure to file an appeal within the prescribed statutory period would entitle the tax authorities to continue or reimpose the blocking of ITC.Issue 3: Direction to Unblock ITC and Conditions ThereofApplying the legal principles to the facts, the Court directed the respondents to unblock the petitioner's ITC amounts blocked on 22.05.2025 and 27.11.2024. The Court's reasoning is grounded on the petitioner's filing of the appeal and the precedent that permits unblocking upon such filing and deposit of 10% of the disputed tax.The Court did not impose any additional conditions but implicitly relied on the procedural safeguards established in the prior ruling. The Court disposed of the writ petitions accordingly, without imposing costs.3. SIGNIFICANT HOLDINGS- 'If an appeal is filed by depositing 10% of the disputed tax, the restrictions under Rule 86A(3) of the CGST Act will come to an end.'- The Court established the principle that the one-year blocking period under Rule 86A(3) is not absolute and can be terminated early upon the taxpayer's compliance with filing an appeal under Section 107 and depositing 10% of the tax confirmed in the assessment order.- The Court held that the petitioner's ITC, which was blocked pursuant to the assessment order, must be unblocked following the filing of the appeal, thereby enabling the petitioner to debit the corresponding ITC from its electronic credit ledger.- The Court clarified that failure to file an appeal within the statutory period would justify continued blocking of ITC by the tax authorities.